Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 5. THE LIFE OF A BOND How It's Created, Issued, Priced, and Traded

THIS CHAPTER PROVIDES the information you need to become an educated bond buyer. Although it may be tempting to skip this material and flip to the chapter on buying bonds, consider this: it will be much harder to profit from the money-making strategies we outline if you don't understand bond basics. Read this chapter to get an overview and refer back to it when you need a refresher to help you understand a particular investment. When we first identify a word or term, we highlight it in boldface to make it easier for you to relocate it.

To induce you to read further, remember that bond returns can be quite lucrative. Consider that when stocks collectively took a hit during the market downturn that began in March 2000 and continued into 2002, the 10-year Treasury bond gained 22 percent in value between May 15 and November 7, 2001.^[46] At the same time, tax-exempt municipal bonds provided yields of 5 percent for bonds maturing between fifteen and nineteen years, and 30-year Treasuries were yielding 5.35 percent. That 5 percent return on municipal bonds is a taxable equivalent yield of better than 7.7 percent for someone in the highest tax bracket, a return that comes with little risk. Trust us. The more you know about bonds, the better off you'll be.

By Way of Background

Let's start at the beginning. Every bond has two components: (1) a time span and (2) a face value. The face value is the term used to describe ...